Arctic Divestment Signal of Global Decarbonization

In a move that until very recently seemed impossible, a real and seismic shift may finally be here in the fight on climate change. The financial world has joined a perfect storm of already turbulent global energy politics, environmentalism, and Mother Nature herself, and is altering course to divest from fossil fuels, most recently focusing on investments in the Arctic. In a very short period of time, dozens of banks, as well as corporates, pension funds and others have declared the Arctic off limits in their exclusion policies, as the physical conditions on the ground are literally deteriorating. Not surprisingly, the oil industry and politicians who support them especially in the US are not pleased, yet this divestment proceeds, globally, with hundreds of organizations publicly committing to do what is necessary to mitigate the effects of climate change and decarbonize our global economy.

In the past fifteen months (September 2019-December 2020), the planet has again approached or broken records for increases in hurricanes, typhoons, floods, fires, the erosion of the planet’s albedo effect via sea ice and ice sheet melt, extraordinarily high Antarctic and Arctic temperatures, with records shattered again November 21, 2020, with temperatures up 12o-30oF above normal. In those same fourteen months, the oil and gas industries have undergone a dramatic upheaval resulting in continued instability. The biggest events in that time frame began with tensions between Iran and Saudi Arabia erupting in September 2019 at the Abqaiq facility just as Saudi Arabia was about to launch Aramco’s IPO which then had to be delayed. This was followed by a power struggle at OPEC+ resulting in a price war between Russia and Saudi Arabia, the abrupt shift in demand due to COVID-19 and the historical nosedive that sent West Texas Intermediate prices to $-37 per barrel. Transportation, especially aviation is slow to come back to pre-COVID levels and according to the International Energy Agency’s (IEA) Chief Energy Modeler, Laura Cozzi, in a webinar sponsored by the Rocky Mountain Institute, the “scars of the pandemic will be felt in the energy sector for the next decade.” From the IEA’s perspective, “the Covid-19 pandemic has caused more disruption to the energy sector than any other event in recent history.”  Strictly in terms of risk to an investment firm, none of these events inspire confidence in continuing a partnership with this industry.

At this same time, in reaction to the rapidly worsening effects of climate change, the environmental justice movement has seen enormous growth, in no small part through social media, especially among the world’s youth, that has galvanized the public in a way not quite seen before. Young environmental leaders like Greta Thunberg, Vanessa Nakate, Leah Thomas inspired a global climate strike from very humble beginnings, and yet have a real voice that is gaining the attention of millions. This surge is empowering and inspiring the larger environmental movement like the Natural Resource Defense Council and Indigenous action groups like the Gwich’in Steering Committee to win landmark cases in favor of Indigenous communities, which in turn puts pressure on corporations and governments to consider their reputational risk and the very public backlash that could be received.

Accompanying all of this is a huge sea-change, the financial market has accelerated towards divestment from the fossil fuel industry, signaling the beginnings of a global economic decarbonization. The six major American financial giants, JP Morgan, Morgan Stanley, Wells Fargo, Citigroup, Goldman Sachs and most recently Bank of America, have all pulled out of the Arctic and three of the top Big Five Canadian banks, the Royal Bank of Canada and TD Bank, the Bank of Montreal, have all pulled out of financing new oil and gas projects in the Arctic. There are twenty more regular banks in the UK, Scotland, and the EU, in addition to asset managers, major insurance companies like SCOR, Nataxis and Suncorp, and recently Lloyd’s of London. New York State is divesting it’s $225 billion pension fund from fossil fuels, joining hundreds o pension funds, universities, faith-based organizations and corporations are divesting from fossil fuels as well, especially concerning the Arctic region, accounting for trillions of dollars not being invested into the industry.

Several banks around the world are realizing that the fossil fuel industry, especially when it comes to Arctic oil and gas exploration and production, present physical and social risks that are far too high. Reasons include difficulties with drilling in the Arctic, to permafrost being too weak to sustain infrastructure, to the guaranteed increase in greenhouse gas emissions and the resulting increase in Earth’s temperature, not to mention the environmental push back that could damage their reputations. Many banks are divesting not just from Arctic projects, but also coal, tar sands, hydraulic fracturing, with some divesting from fossil fuels altogether by 2021. The six major American firms that funded projects in the Arctic have agreed to no longer provide financing for new project, and three Canadian firms, the Royal Canadian Bank, TD Bank and the Bank of Montreal have recently joined the trend as well. European investment and development banks are pulling away, including Deutsche Bank, Barclays, BNP Paribas, HSBC, Credit Suisse, ING, and UBS. The Royal Bank of Scotland/NatWest won’t deal with anyone who isn’t aligned with the Paris Agreement and the European Investment Bank won’t fund fossil fuel projects at all past 2021.

            As of the time of this writing, 24 of the 35 most offending Arctic financiers that were identified by BankTrack, the Sierra Club and the Rainforest Action Network’s 2020 report, Banking on Climate Change, have developed Arctic divestment policies. Most generally state that they will no longer fund new oil and gas exploration, production, transportation, nor their related services in the Arctic, with some specifically calling out the ANWR as off limits in their policies. However, others like BBVA will still finance new infrastructure of existing projects such as pipelines and terminals. This is definitely part of larger trend towards divestment from fossil fuels as 20 out of 23 of those same banks have also developed more stringent policies towards coal with some drawing down financing altogether. Deutsche Bank, ING and JP Morgan Chase are exiting the coal industry by 2025; Unicredit plans to exit by 2028, and Citigroup plans to follow suit by 2030.

The BankTrack 2020 report puts the investment of these same 23 banks at over $16.4 billion from 2016-2019, putting the average just over $4.1 billion per year. When comparing the amount these banks invested in the Arctic with their overall fossil fuel portfolio (FFP), thirteen financial firms spent less than 1% of their total investment in the sector and nine banks invested 1-3% of their total FFP in the Arctic. On the higher end, Unicredit invested just over 5% and Commerzbank investing almost 7% of their total FFP into Arctic projects between 2016-2019.

These banks aren’t divesting from the energy market entirely, they are reinvesting through green bonds into various clean energy, green tech, infrastructure, and transportation projects. The Bank of Montreal had the lowest percentage in the Arctic, at 0.0365% – or $30 million in Arctic out of $82.115 billion, but is putting $400 billion in green investments by 2050. BBVA, who invested 0.7219%, or $126 million of their $17.452 billion overall FFP is pledging $400 billion by 2025, ING, who spent 1.652% of their total FFP ($619m/$37.462b) in the Arctic, are pledging to steer their $600 billion loan book towards greener investments and Commerze Bank, who spend the largest percentage of their total FFP in the Arctic pledged $328 billion to renewable energy projects and green bonds.

Multiple platforms have been established to keep banks and other participating institutions honest, committing to aligning their portfolios with climate friendly positions in keeping with the Sustainable Development Goals (SDGs) and/or the Paris Agreement that also secure the rights of Indigenous peoples. The SDGs recognize that a most vital ingredient to effect change in policy is finance, mentioning its role multiple times in the framework, including in SDG 13: Climate Action (5):, in setting up a Green Climate Fund that intends to raise $100 billion annually to help developing countries face climate change related issues. As these institutions made this type commitment, it was inevitable that they would consider the science on climate change when calculating acceptable risk in an investment. 

Four of the most commonly used platforms are

  • United Nations Environment Programme Financial Initiative (UNEP FI), which is aligned with the Sustainable Development Goals, the Paris agreement and has 300 banks, insurers and investors.
  • Equator Principles (EP), SDG and Paris agreement aligned, looks at infrastructure projects from start to finish for financial risk management concerning environmental issues.
  • Climate Action 100 (CA100+), investments made to “ensure the ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change”
  • RE100: works with clients to gear their investments towards renewable energy and others working to reduce or eliminate financial commitments, reduce emissions and work towards a greener future.

Of the 23 banks from the Banking on Climate Change 2020 report, 19 have signed on to the UNEP FI, 17 committed to the Renewable Energy 100, 15 agreed to the Equator Principles, and 10 pledged to the Climate Action 100+.  Only five have committed to all four of these instruments: Credit Suisse, HBSC, Royal Bank of Scotland, (now NatWest), TD Bank and Wells Fargo.

The Institute for Energy Economics and Financial Analysis report names 100 financial institutions that have divested from coal and adds three more banks to the list of Arctic divestors, the Lloyds Banking Group, the National Bank of Australia and Svenska Handlesbanken AB, who stated that while they didn’t think that full divestment from “every sector with enhanced climate risks” wDas the way to proceed, “the current rate of change in oil and gas companies is too slow” and that divestment from that sector was, in fact, correct. All three of those banks are committed to the UNEP FI and Equator Principals, but only Lloyds and NAB aligned with the RE100 platform. They have two asset managers, Credit Mutuel Asset Management and Robeco. The report cites three development banks: CDC Group, FMO (Dutch Development Bank) and KfW (Germany), three insurers: Nataxis, SCOR, Suncorp, as well as six multilateral development banks: African Development Bank, Asian Bank of Development, European Bank for Reconstruction and Development, Regional Development bank in Sri Lanka, the European Investment Bank, the World Bank, Agence France Development.  The European Investment Bank plans to end all fossil fuel finance by 2021 and has already invested EUR 130.8 billion in their Climate Awareness Bond, the first green bond and has pledged another EUR 1 trillion in “climate action & sustainability” between 2021 and 2030. Global insurers have also been backing away, with many only promising to withdraw from fossil fuels with respect to coal and tar sands oil. Four have decided to stop insuring any new Arctic oil projects, most recently Lloyd’s of London, as well as SCOR, Nataxis, and Suncorp, who intends to cease insuring fossil fuels entirely.

The DivestInvest movement is a massive social contract towards decarbonization of global banks, private investors, universities, faith-based organizations and beyond, “united in the belief that by using our collective influence as investors to divest from fossil fuels, and invest in climate solutions, we can accelerate the transition to a zero-carbon economy.” The three banks on the DivestInvest list that are completely leaving fossil fuels are the Bendigo and Adelaide Bank, Ltd., (Australia), Alternative Bank Schweiz (Switzerland) and Amalgamated Bank (USA). The remaining banks on this list are divesting from coal/coal and tar sands. There are 135 out of 181 or 75% of the committed universities that are divesting fully from fossil fuels. The University of California can be updated to this list as of May 2020, becoming the United States’ “largest educational institution” to divest from fossil fuels. Of the 392 faith-based organizations making this commitment, including the Church of England, 95.153% or 373 of them are divesting completely and 79.71% or 110 of the 138 pension funds in the partnership are following suit and of the 181 foundations involved, 100% are fully divesting from the fossil fuel industry. DivestInvest tallies their partners’ combined assets at $14.1 trillion.(16) Pope Francis himself has made a very public address to all Catholics, especially those in finance, to make their decisions based more on whether or not it will protect the environment.

Sally Barr

1 Comment

  1. Claude-Lise Lafranque on 29 December 2020 at 8:50 pm

    Great article! Encouraging and hopeful.

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